FYI: This Chip Maker is a Good Investment
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Micron Technology (NASDAQ: MU), the world’s second largest DRAM manufacturer, seems to have superb upside potential as it has emerged as a powerful entity in the semiconductor industry after its recent acquisition of Elpida Memory, the leader in mobile DRAM products. Not only this, Micron also acquired another 24% share in Rexchip, another DRAM manufacturer, taking the total stake in Rexchip to 89%. Though the chip maker has been facing disappointing quarters, the recent developments have created an air of improved expectations around the company. Let’s check out what makes this stock a good investment.
Problems Micron is Facing
Like I already mentioned, Micron has been facing dismal quarters lately, and the recently ended third quarter of fiscal 2012 was no exception. Though the chip maker did well when it came to beating analyst estimates of $2 billion revenue and went ahead to post a top line of $2.17 billion, reflecting a 3% rise sequentially, the company failed to match up to the expected loss of $0.20 per share and posted a $0.32 loss per share for the quarter.
The problem of increased losses has to do largely with the decreasing margins in the DRAM industry. Though Micron has diversified its business over the past few years, the DRAM (Dynamic Random Access Memory) business continues to have a significant impact on the revenue of the chip maker. The recent slowdown in the PC sales due to the increased popularity of tablet computers from makers such as Apple (NASDAQ: AAPL) and Samsung have served as a huge blow to the DRAM business. Along with this, the anticipation of the launch of the new Windows platform from Microsoft has also acted as a demand-softener.
Micron is Not Alone
In a situation where PC makers such as Dell (NASDAQ: DELL) and HP (NYSE: HPQ) are suffering from falling margins and red bottom line growth, PC component makers also can’t be expected to report profits. Both these PC makers have been hit hard by the poor market condition and while Dell reported an 18% dip in its bottom line, HP posted a disappointing $4.49 loss per share. However, analysts are hopeful for both the companies and expect them to improve their health substantially once Windows 8 is available for use. Analysts also have similar expectations from our DRAM manufacturer Micron.
The demand softness has resulted in increased DRAM inventories for the OEMs who are trying hard to clear the existing stock. But the efforts are not yielding any value as even price cuts have failed to generate demand and as a result the entire industry has been suffering from diminishing margins, forcing major consolidations to take place. The only two players who stood as exceptions and posted profits are Samsung and Hynix. The Micron-Elpida deal is just a reaction of the ongoing situation and also a solution for Micron’s problems.
Elpida, A Great Buy
The acquisition of Elpida, the bankrupt Japanese semiconductor giant for $2.5 billion, which is actually worth $3.5 billion, and the increased stake in Rexchip act as a boon for Micron as these moves position the chip maker as the second largest DRAM manufacturer right after the South Korean giant Samsung. But, among both the buys, Elpida is likely to be more beneficial to Micron. So, what other than the fact that Micron acquired Elpida at a huge discount makes this company such a great buy? Well, the answer lies in the growth prospects thanks to Elpida’s value chain.
For Micron the acquisition means expansion as well as diversification. This move has opened the doors for Micron to Elpida’s mobile DRAM technology, which the company now plans to use in synergy with its existing DRAM business and thus enjoy benefits from both the PC and tablet market. Elpida is a major chip supplier to Apple and after this acquisition Micron will be a key supplier to the iPhone maker and thus benefit from being a part of Apple’s ecosystem. Once the iPhone 5 is launched on September 12, the stock price of Apple is expected to shoot up significantly and all players who will be associated with the iPhone maker are also expected to benefit from this success. In the coming days also, the demand for mobile DRAM and SSD (Solid State Drive) are expected to improve substantially as more and more companies like Microsoft enter the tablets space. Even players such as Nokia and HTC are potential customers for Elpida’s offerings.
Concluding thoughts
Elpida will start functioning as a subsidiary of Micron from first quarter of 2013, after the deal is closed, and soon after that the positive contributions from the acquisition will be reflected in Micron’s results. The diverse product offerings of Micron are going to benefit the company hugely as the demand for DRAMs and SSDs grow. A hot segment in the technology space is storage and as the demand for this grows, Micron is also going to benefit since storage capabilities are dependent on NAND flash memory which the chip maker also offers.
Again, as the Windows 8 platform is released, the DRAM prices can be expected to surge as a reaction to the increased demand; the launch of the latest iPhone will trigger the price rise for mobile DRAM. The majority of analysts are considering Micron to be very attractive and have either a buy or a strong buy position, and because of all this I consider Micron to be a good investment opportunity.
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